MANAGEMENT STUDIES DEPARTMENT

Banking
Assignment on Islamic Banking
Submitted By: Umer Farooq

2012

GCU LAHORE

1. Explain the term, Musharakah" and its main points? Answer: Musharakah is a term from Arabic language, which means Sharing. Basically this term is generally used to express Islamic mode of financing or banking. We can better understand it in the following important points, In a non Islamic banking system which is all around us, there is a term called as interest. This is a rate which is to be paid by a person who acquires a loan from the bank. Like now a day, interest rate is supposing 21% and a person takes one hundred thousand as a loan from a bank, he will have to pay one lack and twenty one thousand due to this interest rate. But Musharka is entirely opposite to the concept of interest rate, and that is why it is the base for Islamic mode of financing. In Islam, the debtor cannot claim for the predefined rate in advance because it is haram in Islam. According to Musharkah, creditor will share the profit when it actually occurs. And it will share the profit in equal ratio and he/she will also have to share the loss equally, this is called true Islamic banking system. 2. What do the different terms of Shirkah" mean? Answer: Basically the term Shirkah is used in Islamic jurisprudence for the term musharkah. Many Islamic scholars have unanimously said that for Islamic mode of financing the term Shirkah should be used instead of musharkah, as it offers wider applicability in our routine life, also its scope is wider in business as compared to musharkah. In Islamic fiqah it has been divided in to two broad kinds, which are as follows. Shirkat-ul-milk Shirkat-ul-aqad

Shirkat-ul-Milk: It means the joint venture of two parties, when two persons agreed to purchase a property or anything and may decide about its use or operation by their mutual consent. And it is an automatic process, like when someone dies who was having any business, than his/her off springs share his/her property through a pre-decided Islamic format. Shirkat-ul-Aqad: Shirkat-ul-aqad means Joint Commercial Enterprise that further means partnership between two or more by their mutual contract. It is further divided into three different categories.

Shirkat-ul-Amwal: It is where all partners invest in commercial enterprise with mutual consent and share the profit by an agreed ratio. Shirkat-ul-Amal: By this term meaning, partners invest in services company like, they doesnt invest in manufacturing or production, they started a service company which provide any kind of service to the customers. And for that customer services, they charge a fee. By the collection of that fee, it will be than equally distributed among all of partners irrespective of ratio of investment. Shirkat-ul-Wujooh: For this kind of Islamic concept, there is no investment at all. Partners actually involved in some kind of trade or brokage business. In such business they can purchase any products or merchandises and then sell them at spot for the sake of business. At the end, they will share their profit with the ratio of investment or at some agreed ratio between the partners. 3. State briefly the position of different Imams? a. b. c. d. e. f. Distribution of profit. Ratio of profit Sharing of loss The Nature of capital Management of Musharakah Termination of Musharakah

Answer: Distribution of profit: Our shariah says that partners should decide about the sharing of the profit at the start of business in a contract. If cannot do so, than this way will not be valid at all.

Ratio of profit: In the view of Imam Malik and Imam Shafi, it is necessary for the validity of musharkah that partners should get profits according to their share of investment in the business, as if someone has invested 25 % of total capital in business, he should get 25% from the overall profit. Whereas Imam Ahmed says, that if a person have invested 30% of capital in a business, he could get the profit of 60% as if it is mentioned in the contract.

The third view is of Imam Abu Hanifa, who says if a person has mentioned in the contract that he would not exert any effort in the business, and he would remain a sleeping partner throughout the business, than in such case, his profit cannot be more than the ratio of his investment in any case.

Sharing of Loss: According to Imam Shafi, both the ratio of profit and loss should exactly conform to the ratio of invested capital in business. But according to Imam Ahmed and Imam Abu Hanifa, the ratio of profit between the partners can vary as compared to the invested capital, but the ratio of loss should always be according to the investment of the partners.

Nature of Capital: Imam Malik is of the view that liquidity of capital is not an issue for Musharakah, therefore a partner can continue in musharkah, with any kind of capital, but his share would be determined at the start of contract date as per market value of the kind of capital. Imam Abu Hanifa and Imam Ahmed are of the view that no contribution in kind is acceptable to musharkah, as in case of different commodities, the commodities would have different values and would be distinguishable among different partners, therefore such procedure will not contribute towards a common ground of business. Imam Shafi explains this as follows. He says that commodities are of two types, one which can be compensated in form of their destruction, and other which cannot be compensated in form of complete destruction. Thus the commodities of first kind can contribute in the kind of capita. But Imam Abu Hanifa explains to it that it could be acceptable only in a way, if the commodities of first kind are mixed in such a way that the commodity of partner A cannot be distinguished from that of partner B. Management of Musharakah Everybody can take part in the management of Musharakah, however if somebody has announced to act as sleeping partner of musharkah, than he would receive profit according to the share of his investment. Termination of Musharakah It can be terminated at any time by any member at his will or personal reason. In case, if a person dies during the currency of musharkah, than it will be considered as terminated. In such case the off springs of deceased person shall get the share of business.

If a person becomes insane or becomes incapable of business transaction, for him musharkah will be considered as terminated.